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Dual-Class Structures: Does the Market Already Have a Fix?

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Aug 14, 2017

On August 14, 2017, following the recent decision of major indices to exclude “dual-class” companies that offer minimal voting rights to public shareholders, the debate about dual-class companies continues to rage – but this recent study suggests that the market may already have a solution, in the form of investors’ demand for a “risk premium” for these stocks.

Here’s the abstract of the study:

Critics advocate eliminating dual class shares. We find that founding families control 89% of dual class firms, potentially confounding economic inferences regarding limited voting shares. To identify the impact of dual class structures on outside shareholders, we examine stock price returns; finding that dual-class family firms earn excess returns of 350 basis points more per year than the benchmark.

Institutional owners garner a disproportionate fraction of these returns by holding over 97% of their floated shares. Overall, we show that investors demand a risk premium for holding dual-class family firms, suggesting a market-driven resolution to concerns about limited voting shares.

If the study’s right, these above-market returns may go a long way to explaining why institutions continue to throw money into these stocks.

Review the study on the Social Science Research Network's website.

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